IEA Sees Oil Price Shock Ahead As Conventional Supply Falls

If the oil industry’s upstream investments continue to be lower next year, there is a material risk that the world could end up with a shortage in new conventional supply in a few years, the International Energy Agency (IEA) said in its annual World Energy Outlook on Wednesday.

The usual concerns about oil and gas supply persist and are now further aggravated by the record drops in investment, the IEA said in its World Energy Outlook 2016 report, in which it also predicts that the global energy scene would see broad transformations until 2040.

In the longer run, investment in the oil and gas industry would be essential for keeping up with demand and replacing declining output. However, the growth of renewables and the increased energy efficiency would lead to lower oil and gas imports in many countries, the IEA said.

Nevertheless, according to the WEO-2016, the world’s demand for oil would continue to rise until 2040, chiefly due to the lack of easy alternatives to oil in the road freight, aviation, and petrochemicals industries. As for the oil demand for passenger cars, it is expected to drop in the next 25 years even if the number of cars doubles, because of higher efficiency, biofuels and the growing number of electric cars.

Commenting on oil prices, the IEA's executive director, Fatih Birol, said upon launching the report that crude prices were facing a period of higher volatility.

“If oil prices rise in the short term, then shale producers can react quite quickly to put more oil on the market, producing a see-saw movement. And if we continue to see subdued investments in new conventional oil projects, this could have profound consequences in the longer term,” Birol said.

Regarding gas, the industry and market will see major transformation in the next 25 years and LNG is expected to account to more than half of the global long-distance gas trade, compared to a quarter of said trade in 2000. The new LNG volumes from the U.S. and Australia would contribute to more competitive gas trade markets and are expected to bring about changes in contractual terms and pricing, the IEA said.

It’s natural gas and renewables - notably wind and solar - that emerge as clear winners for the next 25 years, the agency’s report says. Natural gas and especially wind and solar energy would replace coal, the champion of the previous 25 years, Birol noted.

Coal, on the other hand, will see its consumption near stagnate through 2040, due to China diversifying its fuel mix and fighting air pollution.

“But there is no single story about the future of global energy: in practice, government policies will determine where we go from here,” Birol said.

The report also cautions that if the world wants to meet more ambitious climate goals, it needs to accelerate efficiency and decarbonization efforts. If nations stick to the Paris Agreement, which entered into force earlier this month, the energy sector in 2040 would see 37 percent of power generation coming from renewables, compared to 23 percent now. The electric vehicles on the road would be 150 million, versus 1.3 million currently.

Analyzing the pledges made in the Paris Agreement, the IEA said that “the era of fossil fuels appears far from over and underscores the challenge of reaching more ambitious climate goals”.

Oil consumption in 2040 is projected at 103.5 million bpd, up from 92.5 million bpd for 2015, the agency noted.

Just last week, the IEA warned that the world could drown in oil if production does not fall beneath demand sometime soon, and pointed to the fact that OPEC’s oil production rose yet again.